The online retailer has a highflying stock, an ambitious CEO, plenty of doubters, and, so far anyway, no earnings.

By BETHANY MCLEAN

October 18, 2004

(FORTUNE Magazine) – Back in the late 1990s, Amazon.com had fans who thought it was revolutionizing retail--and skeptics who said it would never make money. Today the same
debate is raging about another e-tailer, Overstock.com (OSTK, $38), which buys excess merchandise from manufacturers and stores and sells it to the public and other retailers. Its
stock has more than doubled in the past year. But skeptics abound: Roughly 40% of its float is sold short.

Like Amazon, Overstock has a charismatic CEO: Patrick Byrne, 41, whose résumé notes that he is a three-time cancer survivor and a black belt in karate, with a Ph.D. in
philosophy from Stanford. Byrne, who likes to toss off comments about, for example, Popper's falsification principle, can be grandiose: He told CNBC that he's building a "multibillion
e-tailer that will be capable of making hundreds of millions of dollars."

But there are big differences between Amazon and Overstock. When Amazon was Overstock's size, it was growing at triple-digit rates. In 1999, for instance, sales grew 169%, to $1.6
billion. Overstock's growth looks sort of similar--sales were up 160% in 2003, to $239 million--but that's because of an accounting change: Overstock now books the full value of the
goods that others sell through it instead of just recording the commission it actually collects. On a comparable basis, Overstock's growth was up 91% in 2003 and 83% through the first
half of 2004.

Another difference is that Overstock's gross margin is much slimmer than Amazon's--11.3%, vs. a comparable 15.7%. Considering Amazon's modest profits, it's hard to see how Overstock
can ever make the math work. In a recent report, Camelback Research Alliance, which has been questioning Overstock for about a year, described the company's prospects by paraphrasing
Gertrude Stein: "Little by little they report nothing but losses, nothing, nothing but losses."

Byrne points out that Overstock's growth rate would be higher if not for the loss of a major customer earlier this year. He also says that Overstock's margins will be "very close to
Amazon's if not surpassing Amazon's very quickly" and that the company (which has little debt) could be profitable today if he ratcheted back its growth. Byrne, who holds roughly 38%
of Overstock both personally and through an investment vehicle he controls, believes: He hasn't taken any salary or bonus in the past three years and has never sold a share.

Can Byrne deliver? He hasn't always. Camelback notes that in the spring of 2001, Byrne suggested Overstock could hit $1 billion in sales by 2003--more than four times what it actually
reported-- with little or no added capital. Overstock has since raised about $100 million by selling stock. "I have a much more evolved understanding of the dynamics between growth,
profitability, and capital needs now," Byrne says.

One thing is clear. Byrne doesn't see Amazon--he calls it the "800-pound hamster" of retail--as a model: "They don't have a wonderful business, and the stock is way overvalued," he
says. But until Byrne proves that his company can make money, the same could be said of Overstock.